The next massive debt bubble to crush the economy – 10 charts examining the upcoming implosion of the student loan market. $1 trillion in student loans and defaults sharply increasing.
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In the land of predatory bubbles it looks like higher education is now fully caught up in the credit market implosion. In the same debt produced vein as housing, college used to be a relatively cheap bet with decent results in the long-term. Even if you went to public universities and picked up a degree in a field with low job prospects, at least you didn’t have the cloud of student loans hanging over your head when you graduated. Today it is a very different ballgame and the mythology behind college is being used to lure people into institutions that are little more than paper mill factories. Even quality institutions are having a harder time justifying tuition and fees that cost upwards of $50,000 per year (or the median household income of an American family). Can the next major crisis come from the student loan market? There is currently close to $1 trillion in student loan debt outstanding. During this crisis most debt sectors contracted except for student loans. Let us examine 10 charts to see why a bubble in student loan debt is about to implode.
Chart #1 – Student loan balance rising
Moody’s Analytics came out with a comprehensive analysis of the student loan bubble. The data presented does not add confidence to the problems occurring in higher education. More to the point, it is the way people are financing their college endeavors. Part of the problem is college costs are soaring while incomes are stagnant or falling. So you have graduates coming out with heavier debt burdens and their incomes are much lower. It is a mathematical problem that was destined to cause issues. As the chart above shows, high cost states which already eat deeply into middle class incomes also have the highest student loan balances only doubling the problem in these states.
Chart #2 – New loan originations growing
It is an odd sort of American situation where the economy contracts but the student loan market is exploding. No other country faces this kind of issue. Yet this is symptomatic of our current perpetual bubble banking system that is designed to increase liquidity in all sorts of markets so Wall Street traders can make a buck on suckering the public into more debt from previously secure sectors like housing or even education. Origination volumes are even higher as more people jump into the higher education bubble feet first.
Chart #3 – Student loan balances keep growing
Student loan debt now surpasses total credit card debt in the United States. While you hear horror stories about credit card debt all the time there is very little discussion on the epidemic of student loan debt. The chart above doesn’t account for the recent trend and it is very likely that we are quickly approaching $1 trillion in total outstanding student loan debt. Keep in mind that the above chart doesn’t cover the total cost of education as you also have many students financing books and other expenses on their credit cards compounding the debt burden.
Chart #4 – Average debt levels
The economic crisis hit in 2007 yet through this time the average student debt levels have increased. This is not a positive development especially when data from the job market is so poor. The fact that more debt is being taken on is troubling for a variety of reasons but one of the most insidious is the fact that many recent graduates are starting to pay on loans with no jobs or jobs that pay just enough to get buy. This is the issue of a low wage capitalism system that has a financial system designed to filter money back to the top one percent through crony politics and protection.
Chart #5 – Higher education enrollments rise
This is where things get dark and remind me of the housing bubble. Historical data for an entire generation showed only home price increases. That is an exceedingly good record. But investment banks and their government colleagues then decided to turn a once safe investment into a casino by using historical trends that just don’t justify the modern day irresponsible corruption in our banking system. The same kind of argument is being used for higher education. Pundits point to historical trends but keep in mind, these are trends that occurred in better times when people weren’t leaving school with insane amounts of debt and entering the worst job market since the Great Depression. As the chart above shows, enrollments are moving steadily up because of this mythology that is being perpetrated.
Chart #6 – College costs versus other costs
No other sector in our economy has seen costs rise so quickly like those of colleges. Tuition and fees have far outpaced every other sector in our economy even surpassing items like healthcare and housing which is hard to believe. But just like housing, since incomes have gone nowhere for decades people are simply financing the pursuit without looking at the real long-term costs of what they are diving into. Being educated is incredibly important. That goes without saying. But how much is too much when it comes to tuition? There is a difference from a nicely built large home in a good area going for a nice amount of money versus poorly built McMansions selling for levels not justified by incomes in those areas. The same goes for a college education. Just because someone adds a “university” or “college” to their title or institution does not make it worth the money.
Chart #7 – Rise of for-profit enrollments
This is really where a large part of the paper mill action is happening. Many for-profits are simply designed to siphon off money from unknowing students and saddle them with unsupportable debt levels in exchange for a piece of paper that isn’t worth it. It is no shock that for-profit enrollment growth shot through the roof with the de-regulation of Wall Street in the late 1990s. Just like subprime loans and exotic financing for-profits are a large player and this only occurred in the last 10 years or so. These institutions have enormous marketing budgets and staff that basically fill out financial aid information for students to exchange paper for paper. This game is going to end and we are starting to see major cracks in the system.
Chart #8 – Default rates at for-profits
Default rates at for-profit institutions are soaring similar to subprime debt in housing. Yet what else do you expect? Employers who are hiring can pick up graduates from name brand schools instead of going with for-profit schools where many simply get a piece of paper with no measurable track record. The default rates are simply a reflection at how extreme the system has become. For-profits are the most egregious problem in higher ed but even name brand schools are having issues with student loan debt levels.
Chart #9 – Default rates to rise
Given the turmoil in the economy default rates are projected to rise. So where does this burden fall? Most of these loans are backed by the government but are issued from banking institutions. Do we have another debt crisis in this sector? I believe we do. Ultimately you will have back breaking student loans that don’t allow strategic defaults like strategies being employed in the housing market. So what will students do if they don’t have the income to pay these loans off? Who takes these losses? These are things that we will soon find out unfortunately.
Chart #10 – Employment by education level
Source: Business Insider
The chart above again reflects this recent trend. A 4-year degree no longer protects you with secure employment. For the first time in our record keeping history do we have over 4 percent of those with a 4-year degree unemployed (roughly 1 out of 4 working Americans has a bachelor’s degree or higher). Yet recent graduates have it much worse. This figure will soar as many more paper mills push out graduates with very little real world employment prospects.
We can see where this higher education bubble is going but in the meantime, you have investment banks and those connected in the government making money hand over fist on the exploitation of working and middle class Americans. I think many Americans are being educated for free on how the system is currently rigged.